Pension freedoms have brought massive change to our profession and a choice of functionality, provider, product and tax wrapper is more important today than ever before as we move to providing income solutions for life.
The freedoms have highlighted the different ways in which wealth from multiple sources and tax wrappers can be used in retirement, placing the focus on a more holistic requirement: managing wealth not only during the individual’s lifetime but with reference to their heirs and future generations.
The two-stage model (accumulating and growing wealth followed by stripping it for income) is out. Instead is a more flexible (fluid even) approach to setting lifetime goals and solutions.
At first sight, the changes appear to have brought with them increased complexity; delve deeper, however, and not much has changed. Any adviser who conducts regular reviews, checks on a client’s life goals and then puts in place a suitable investment strategy to meet those goals is well placed to succeed.
A holistic fact-find is the first step. Knowing all sources of wealth – how many different pots of wealth a client has, where they sit and how they complement each other – is essential if we are looking to optimise outcomes for a client.
Different wrappers come with different tax implications; knowing which to use and when is key.
To maximise efficiencies, platforms are the only vehicle available to consolidate, record and deliver income across all tax wrappers, ensuring clients receive their income on the date of their choosing.
Let’s take a closer look at the key considerations when retirement planning today and how we can create a client’s financial plan to meet their goals:
Recent tax changes have shifted the implications firmly to the individual and away from the funds or other assets being used.
On the positive side, we can now effectively assume all returns within a qualifying pension or Isa are rolling up gross. An ‘unwrapped’ general investment account continues to come with tax implications for both income receipts and any disposals.
Even though pension limits continue to attract the attention of the Chancellor, it is only the seriously wealthy who need to consider alternative products such as life bonds, VCTs, EIS or AIM portfolios as part of their wealth (and tax) planning.
Managing longevity risk is critical. Running out of money is the number one fear for clients.
Take out more money than the assets have earned and the pot will reduce. Keep doing it and it will be exhausted.
Falling markets are an opportunity for pound cost averaging when we are investing; conversely it is very different when withdrawing funds.
Sequencing risk describes the situation of capital withdrawal during falling markets. A reduced pot size requires an investment to work harder in future years, potentially leading to a re-assessment of a client’s attitude to risk as more risky investments may be needed to regain the lost ground.
Alternatively, do we need to reduce the level of income? Get it wrong and the only choice is lower living standards or increasing longevity risk.
Managing client expectations and/or investing habits is all about long-term relationships with clients – encouraging them to save more, spend less and make plans to leave a legacy, thus creating bigger pots, more flexibility and greater security.
In the UK today, there is more need for financial advisers than perhaps ever before.
Richard Lloyd is an investment specialist at Zurich UK